Vacant offices face long wait to find tenants despite low rent

PUBLISHED : Wednesday, 26 August, 1998, 12:00am
UPDATED : Wednesday, 26 August, 1998, 12:00am

Office rents are likely to bottom out in the next 18 to 24 months, but it could take at least five years for Shanghai's stock of office space to be filled, according to property consultant First Pacific Davies.

First Pacific Davies said in a report that Grade A or international Grade A quality office space would reach 21.52 million square feet by the end of the year or early next year, with the vacancy rate peaking at 45 per cent.

'More worryingly, in terms of total vacant space, vacancy is expected to double over the next 18 months,' it said.

This would continue to bring down rents and sale prices, but demand would move up slowly.

Analysts said that, due to overbuilding in the early 1990s, the city had one of the highest vacancy rates in the country, which raised concern in Beijing.

First Pacific Davies said Shanghai's stock of office space rose almost tenfold between the end of 1994 and last year, sending rents tumbling by 50 per cent in even the best buildings and vacancy rates from almost zero to at least 40 per cent in the Grade A market.

By the end of last year, overseas-sale office space reached 28.19 million square feet. In the first half of the year, this rose by 3.51 million square feet, as construction showed no sign of slowing.

The city, as in other parts of the country, divides the property market into two segments - one for locals, the other for foreigners, which is more expensive.

First Pacific Davies said the rate of completion for new projects would slow down after next year, so it was possible 'vacancy rates will come down significantly and rents begin to recover'.

However, only 15 per cent of the office space could strictly be considered international Grade A standard - which matches the quality of high grade buildings overseas - and demand for such space remained robust, it said.

First Pacific Davies said foreign companies were unlikely to fill the new buildings, so much of the demand would have to come from mainland companies.

'But rents must come down to a level they can afford.' Rents were likely to level out when vacancies peaked at the end of next year.

By then, Grade A office space would average about 92 US cents a square foot a month, and international Grade A US$1.94 a square foot a month.